Trump Administration Faces Difficult Task Navigating a Strong Dollar

Will the strong United States dollar dominate the economic policy of the Trump administration?

It seems that this might be the case. Consider an article by Andrew Tangel and Josh Zumbrun in The Wall Street Journal.

"A strengthening dollar is re-emerging as a threat to U.S. manufacturers by making their exports more expensive and their foreign earnings less valuable."

"The WSJ Dollar Index, which measures the U.S. currency against 16 others, hit a 14-year high last week."

To get some idea of how this dollar strength might impact the U. S. economy, The Journal asked Ben Herzon, a senior economist at Macroeconomic Advisers, to run some simulations to get a feel for how a stronger dollar could impact the economy.

"if the dollar doesn't strengthen further, inflation-adjusted GDP would cumulatively rise by 6.3% over the next three years."

"If it strengthens by 10%, that growth would be 4.5%...."

The pain of this increase "would be especially concentrated in U.S. factories. Manufacturing production would be 3.6 percentage points lower under a strong dollar, inflation-adjusted imports would be 3.6 percentage points higher, and real exports from the U.S. to the rest of the world would be 6.2 percentage points lower."

The hope is that the Trump administration's economic policies would counter this stronger dollar.

Hopes for Trump's policies focus on lower taxes, lighter regulatory burdens, and plans to overhaul infrastructure to increase economic growth and overcome the decline in exports.

The concern about Trump's policies is whether they are backward focused. That is, Trump's policies might be aimed at the way the world used to be. The policies might be built around old models and old policy prescriptions based on demand side economics. Consider the following: 

  • The economic growth of the United States, although weak, is higher than it is in many other countries and, as a consequence, many of these other countries are following economic policies that weaken their currencies. This situation will continue throughout the next four years, at least. This policy environment has not been a common consideration in previous policy discussions.

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